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International Securities and Markets Authority provides you a variety of services and informational resources to address the questions and concerns that you may face as an investor and help you invest wisely and be on your guard about fraudulent activities.
International Securities and Markets Authority is warning investors to watch out for unsolicited investment offers, after receiving complaints about aggressive telephone stock promotions. Typical complaints describe high-pressure sales tactics and verbal promises that the stock will soon be listed at a higher price.
High-pressure sales tactics are a warning sign to investigate before you invest; a great investment opportunity should stand up to the test of further research. Federal securities law is designed to maintain fair and efficient capital markets. Unfortunately, unscrupulous individuals closely scrutinize the laws, looking for new ways to exploit unsuspecting investors.
One example of this is the "pump and dump" schemes that operated in the late 1990's. These operations used aggressive sales tactics to sell penny stocks to investors at inflated prices. After maximizing their own profit by creating an artificial market for the stocks, they left those same investors holding worthless shares. The penny stock dealers defended their actions by pointing out that sellers are free to ask any price for their securities on the open market - it is up to the buyer to decide what price they want to pay. While this philosophy is a cornerstone of the free market economy, these companies were not upholding the spirit of the law. International Securities and Markets Authority established that the "pump and dump" operators were "not acting in the public interest" and International Securities and Markets Authority put them out of business.
In a more recent example, International Securities and Markets Authority has received complaints about abuse of the "Accredited Investor" exemption. Generally, a prospectus must be issued before a registered representative can sell shares to the public, however there are exemptions to these requirements. The exemption allows a company to sell to qualifying investors without a prospectus.
Some unscrupulous salespeople have persuaded investors who do not meet the criteria to sign a form stating they are accredited and invest in high-risk ventures.
They do this by suggesting that the government unfairly allows wealthy people to take advantage of the really great investment opportunities. The reality is that the exemption rule is in place to make it easier for small businesses to access capital, and provide protection to investors.
To protect your money:
International Securities and Markets Authority is warning investors to beware of promoters who advise them to make misrepresentations about their financial status in order to qualify to invest in high risk exempt market securities. The concerns stem from increasing evidence of these practices in the market.
In a typical scenario, a potential investor receives a telephone call, often from a stock promoter or salesperson that they do not know. Investors should be particularly wary of investment advice given by total strangers, particularly when the advice comes in a "cold call" or over the Internet. The promoter may recommend a particular stock, and note that the investment is limited to accredited investors but that this is a technical requirement, and that an exception will be made for this investor. This advice would see the investor lie about their financial situation to qualify to buy the securities.
The advice to break the law should be a further red flag for the potential investor – after all, if the promoter is recommending that one rule be broken, what assurance does the investor have that other rules will not also be broken, resulting in financial loss?
The reasoning behind this exemption is that if you meet these criteria, you can afford professional advice and can afford to take on a higher risk with your investment activities. If you do not meet the criteria, the investment likely carries more risk than you can afford.
Often, the promoter also makes statements about the stock's likelihood to make investors rich, either because its value is destined to increase dramatically or because it is about to be listed on a stock exchange. Those statements are further violations of the Securities Act.
International Securities and Markets Authority is warning investors of a two-stage stock scam involving worthless stock, “swaps” and salespeople claiming to represent legitimate companies.
International Securities and Markets Authority has received complaints concerning this scam from various investors.
In a typical “pump and dump” scheme, an investor is approached by a brokerage house's salesperson and offered an incredible deal on a stock described as a once-in-a-lifetime investment.
The stock is likely to be a US-based, over-the-counter, smaller company stock worth fractions of a cent.
The brokerage house, while holding a large block of the stock, actively promotes the stock so that the price is driven significantly upward.
Once a sufficient number of investors have overpaid for the stock, the brokerage house ceases to support the market for the stock and the value of the stock falls dramatically, usually to less than one cent per share.
The “brokerage house” promptly closes up shop, and the victim is left holding worthless stock for which there is apparently no demand.
Still holding worthless stock, the investor is approached by someone posing as a sales representative of a legitimate-sounding company. It is important to note that the company named was not involved in the scam. The scam artist simply used the name of a legitimate company to make his pitch believable.
The sales representative told the victim that he represented a group of clients trying to acquire stocks that had recently declined in order to receive tax cuts. The sales representative proposed that the victim swap the worthless stock for recognized blue chip stock held by the tax-burdened clients.
For the purposes of the swap the victim’s stocks would be valued at the price(s) that the victim paid.
Since the blue chip stock was priced higher than the value of the victim’s stock, the victim was required to pay the difference in the value of the stocks. In one case, a victim submitted US$ 15,000.00 to an international bank where the suspect held an account. The victim did not actually receive the blue chip stock, but instead was swindled a second time.
International Securities and Markets Authority is concerned that investors might be selling stock at below-market price based on misleading information, reminds investors to carefully review any offer for their shares. Firms or individuals who seek to buy shares at below-market price should warn shareholders that the offer price is below the market price and clearly calculate the final price to be paid for the shares. In addition, they should describe investors’ right to withdraw from the offer, known as a mini-tender.
Shareholders receive an offer for their shares, usually at a price that is much lower than the market price of the shares. The mini-tender offeror tries to buy less than 20% of the target company’s shares so they don’t have to file documents with the securities commissions or communicate with shareholders. They profit by selling the shares on the open market at a higher price.
Mini-tenders should not be confused with take-over bids which involve larger numbers of shares. Once you agree to a mini-tender you are normally locked into the deal, but in a take-over bid you may be able to change your mind. Another difference between mini-tenders and take-over bids is that the target company doesn’t need to tell its shareholders about the mini-tender offer. In a take-over bid the company must notify all shareholders.
You may misunderstand the offer and feel pressured to sell the shares at the offer price or not realize that the offer price is lower than what you could get by selling the shares on the open market. Offerors that rely on such misunderstandings may be violating the anti-fraud provisions of federal securities laws. The offeror can terminate its offer at any time, delay payment for the shares and change the offer. They may decide not to buy the shares at the last minute. Mini-tenders usually benefit the offeror at the expense of investors.
You might participate to avoid brokerage commissions that would make selling the shares very costly, such as when you sell a small number of shares or when the shares are hard to sell. Check with your adviser to see if a mini-tender is in your best interests.
Some tips:
Scam artists will do anything to gain your trust in order to entice you to invest in their schemes, warns International Securities and Markets Authority. They may make promises of huge profits from investing in offshore markets and may even guarantee the returns to give you a sense of security. They are aware of the large amounts of money you pay in taxes and your frustration with earning low returns. They will pretend to share your opinions and sympathize with your frustration
In one example, farmers were approached through investment seminars about offshore opportunities with guaranteed returns of 15%. One potential investor was told that the large banks use depositors’ money to invest in these same offshore markets for their own profits.
When someone offers you returns that are more than the going rate, there is more of a risk that you will lose your money. Are you taking on more risk than you can afford?
There are several red flags you can watch out for when evaluating investment opportunities, so make sure you know the risks.
Offshore investment opportunities – once you send your money out of the country, you lose any protections provided by the federal laws. Frauds and scams frequently involve an offshore institution to make it more difficult to trace the transactions. Once your money is in someone else’s control you may have difficulty getting it back.
Unsubstantiated guarantees – a guarantee is only as good as the person or company making the guarantee, and their credit rating. If they can borrow money from the bank at 8% and invest it at 15%, why are they willing to pay you 15% on your money?
High return and low risk – the higher the promised return on an investment, the greater the risk. If you think that a guarantee lowers your risk, read about unsubstantiated guarantees, above.
To protect your money:
If you get an unsolicited telephone call about an investment opportunity, be alert to the signs of fraud, warns International Securities and Markets Authority. You might be a target of a boiler room operation.
Boiler room operations wear many disguises and they are once again rearing their ugly head in. Boiler room operators hope to give you a false sense of security with promises of quick profits – but the only ones that profit are the scam artists, at your expense.
They may be located in the financial district near reputable firms, but their address may be nothing more than a rented space tucked away from the public eye. Rarely, if ever, are the offers they peddle to your benefit. Why would a complete stranger call to offer you a no-risk, high-return investment? It is too good to be true.
To gain your trust, the salesperson may boast of a business idea that sounds probable - perhaps a company in the medical industry with a new technological breakthrough for detecting cancer. The pitch is that with your investment, the company could go public on the stock exchange and make you more money. The scam artist may also try to play on your sympathies - he or she may know that cancer has taken the life of someone dear to you. Or perhaps they know that you are a busy professional, with extra income to invest and little time to do your own research. Regardless of the background, the investment opportunity will be sold on the promise of quick profits.
If the offer is really such a great deal, there should be no need for a broker to cold call strangers to promote it. Ask yourself why they are calling you. To avoid becoming a victim of a boiler room, watch out for:
International Securities and Markets Authority is warning investors to steer clear of Ponzi-style investment schemes; many con artists use this process to get your money.
The first known Ponzi scheme was operated by Carl Ponzi himself. In 1920’s Boston, Ponzi collected $9.8 million from 10,550 investors, including 75% of the Boston Police force. Ponzi then delivered $7.8 million to his investors as “return” on their investments and spent the rest of the money. Ponzi’s original investors were please with their “returns” that they happily helped him find more investors. The Ponzi scheme thrived until the media took notice; Carl Ponzi was finally arrested and ended up in bankruptcy court. In the end everyone lost money; the bankruptcy trustee sued the individuals who made gains from the Ponzi scheme so Carl Ponzi’s debts could be paid to his creditors.
How did Ponzi lure so many people into his scheme? Investors were attracted to Ponzi’s plan because he guaranteed high returns over a short period of time – profits of 50% every 45 days. Unfortunately, these returns were paid from the investors’ own money and the contributions of other investors. The essence of the Ponzi scheme is that money is ‘borrowed from Peter to pay Paul.
Today’s Ponzi schemes look like real investment opportunities. These schemes work well because:
The Ponzi operator often convinces investors to put their ‘profits’ back into the Ponzi; ultimately they lose their original investment plus any profits they may have earned. Ponzi schemes spread by word of mouth. As more people hear of the apparently profitable investment, more investors want to get in on it. Early investors are paid out of money from new investors, at times for many years until the Ponzi collapses. The Ponzi scheme comes to an end when the number of new investors inevitably falls. With fewer new investors, there is no new money to pay the returns. If you lose your money to a Ponzi scheme, chances are you will not get your money back.
Although a Ponzi scheme can be difficult to spot, the following tips will help you protect your money from con artists:
International Securities and Markets Authority is encouraging the public to consider the difference between marketing publications and investment advice. Unsolicited investment newsletters are commonly sent out by fax and e-mail by firms that are paid to promote investments. Before you act on the material, consider that it may not give you a balanced picture.
Promotional Language:
What you should watch out for:
International Securities and Markets Authority created this guide to help you understand how leverage is used in investing. It is intended as an overview of borrowing to invest. Before you invest with borrowed money, make sure you understand the risks of using a leverage strategy in your portfolio.
Leveraged investing is defined as borrowing money to finance an investment. You are familiar with the concept of leverage if you’ve ever:
Both individuals and companies use leverage as an investment strategy; a company with a lot of debt is considered highly leveraged. Leverage can be an effective way to boost returns in your investment portfolio, but you should also understand the potential consequences of borrowing to invest.
Leverage magnifies your losses as well as your gains, and you must be able to withstand those losses if you are going to use borrowed money to invest. The leveraged investment should be suitable to your investment goals and objectives and consistent with the “know your client” information that you have provided to your dealer or adviser. It is both your responsibility and your adviser’s to ensure that you understand the investment, and are comfortable with the risk level.
Can You Handle the Risk?
Is leverage right for you? Ask yourself these questions:
John Doe uses $50,000.00 from a bank line of credit to buy stocks. He secures the credit line using his home as collateral. This type of investment is a form of leverage, because John is using borrowed funds to finance his investment in stocks. John hopes that the value of his investment will increase to the point where he earns more from the investment than he is paying toward the interest on the line of credit.
If John’s investment decreases in value, he still has to make his monthly line of credit payment at the amount he originally negotiated. If John cannot make his monthly payment, he may have to sell the shares even if they have decreased in value. If the value of the shares does not cover the balance owing, he may be forced to sell his home.
Any asset used as collateral, including your house, can be taken by your creditor to satisfy the debt.
Larry has $75,000 saved for his retirement, which is five years away. Concerned that his savings will not support his lifestyle, Larry consults with a mutual fund salesperson. He tells Larry that a lender will match the amount of Larry’s investment with a $75,000 loan, which he can use to invest in more mutual funds.
According to the salesperson, Larry will easily be able to make the monthly interest payments on the loan by selling a small portion of the mutual funds each month. In this example we assume that fund companies allow 10% of holdings to be sold each year without triggering deferred sales charges.
This strategy will only work if the value of the new mutual funds steadily increases. If the funds decrease, Larry will still have to make the interest payments on the borrowed money. Larry should also realize that the mutual fund salesperson receives a commission check for the initial sale of the funds, and may receive ongoing commission (trailer fees). Larry might also consider whether he wants to go into debt for an investment that can fluctuate in value, considering his approaching retirement.
Investors should always be in a position to be able to pay for investment loans out of cash flow. Closely consider the fees associated with this type of investment. Many investors use leverage in this way to contribute more money and generate a higher tax refund. A common strategy is to use the tax refund to pay off or pay down the loan, decreasing the amount of interest payable.
Buying on Margin
When you buy securities on margin, you pay for a portion of the value of the securities purchased, and borrow the rest of the money from a registered investment dealer. Under federal securities laws, your investment dealer can only loan you a set of percentage of the value of your investment, known as the maximum loan value. The maximum loan value depends with the type of securities you are buying.
What Are the Risks of Borrowing on Margin?
If the value of your loan exceeds the allowed loan value, the dealer makes a margin call, requesting that you deposit more money into your account to protect the loan. If you cannot meet the margin call, the dealer can sell some or all of your investment, even at a loss, to make up the shortfall.
In times of market decline, margin borrowing can be a quick way to lose money. While you can buy more securities using margin than you could without a loan, you could lose more than what you paid for the investment. You should be prepared to deposit more money on short notice, in order to meet margin requirements in a fluctuating market.
Short Selling
Short selling is a leveraging strategy that lets you take advantage of market declines. If you think the price of a security is going to drop, you can borrow shares of that security from your investment dealer and sell them at the current high price. If the share price falls, you can purchase the shares at the lower price on the open market and “return” the borrowed shares to your dealer. You profit by selling shares at the higher price, and buying at the lower price.
What are the Risks of Short Selling?
You are speculating that the security value will fall, so you can lose money if the value rises instead. Margin requirements for short selling are much higher than typical margin borrowing, because of the risk of using borrowed shares.
When borrowing on margin, understand what your obligations are, and ensure that you can meet those obligations. If you cannot pay the interest or meet a margin call on your account, the investment dealer has the right to sell your securities, even at a loss. It is not a good idea to use short selling unless your cash flow can easily cover potential losses.
Well, there are two main ways you can go about trading stocks. The first to work with a financial adviser or salesperson that is registered with International Securities and Markets Authority. Based on his training, knowledge of the various available stocks and the quality of research his firm and other firms may do on companies, the salesperson should be able to recommend stocks that meet your objectives. He must work for a company that is also registered as an investment dealer and the firm must also be registered.
The second method is to go directly to a company registered as an investment dealer instead of going to a registered salesperson for advice first. Many people have self-directed accounts at discount brokerages and manage their own portfolios. But you need to be pretty savvy to be able to sift through all the information that’s available out there on various investments and then decide where to invest your money.
Whether you deal with a salesperson at a dealer, or buy and sell online or over the phone, there are some key decisions you have to make with respect to making your trade orders.
The price of stocks and bonds can change from second to second throughout the day, depending on how much investors are willing to pay for them. Both the amounts you pay for them and make back when you sell later on can depend on how quickly your order is processed, or what instructions you give your dealer to handle your order.
Placing a ‘market’ order gives your dealer permission to buy or sell stocks for you at whatever the price for the stock is at the time.
On the other hand, placing a ‘limit’ order gives you more control over the price your salesperson or dealer buys or sells at, but your order may not be filled right away.
A limit order allows you to set a price limit for the stock your salesperson is trying to buy or sell for you. You will not end up paying more than the limit. If you’re selling some of your stock, the order will go through at or above the price you set, so you’ll never end up selling your stock for less than you expected. If the price of the stock is not within your ‘limit order,’ you may not end up buying or selling the stock at all.
You can increase your chances of the order going through by placing a certain type of limit order. For example, a ‘day’ order can be placed, but is only good for the day the order is entered. When an ‘open’ order is placed, it is good for a maximum of 30 days, or a GTC (good till cancelled) order can be placed, and is good until it is cancelled by you.
Orders will only be processed if you either have money in your brokerage account, or have arranged for a margin account which allows you to borrow money from the dealer for part of your investments.
If you buy a stock, the value of your investment will increase or decrease depending on a variety of factors that can affect the price of the stock, including the well-being of the company, the economy and the amount of stock available to be traded.
The internet can be an invaluable tool for investors and offers a wealth of information about financial markets and personal investing. News services, government agencies, stock exchanges, mutual fund companies, securities and financial advisers have established literally hundreds of websites that provide up-to-date information on investing and products. With just a few keystrokes, an investor with a computer and modem can have access to more educational materials and current market data than ever before.
Investors who venture into the online world, however, should keep in mind that the power of the Internet is also being exploited by investment con artists and fast-buck operators who want nothing more than to separate you from your hard earned money.
The International Stock Regulators has mounted important new programs to stop cyber-fraud, but there are still many places on the Internet for swindlers to set up shop. This does not mean that cyberspace should be avoided, but it does mean that investors should be alert to improper practices such as:
The law requires that people in the business of trading or advising in securities be registered or licensed in the state or territory in which they do business. Increasingly, dealers from abroad are advertising their services over the Internet and the world wide web and are accepting clients and conducting business in jurisdictions where they are not registered.
Online Touts and Promotions
Online bulletin boards, news groups and discussion groups dedicated to investment topics can be effective forums for investors to share ideas about personal finance. Unfortunately, some con artists have used these forums to tout specific securities for their own enrichment. Frequently using aliases, these con artists post messages calculated to spark interest in a security, usually one that is traded on a venture capital or over-the-counter market.
The messages sometimes take the form of testimonials or fake conversations. They often include unsupported share price predictions or 'hot tips' about important news that has not been publicly disclosed. What the messages do not disclose is that the person is hyping the security only for personal gain.
Information that appears on a computer is not necessarily true. Regulators are receiving an increasing number of complaints about misrepresentations in investment information distributed through the internet or by email.
Often the misinformation has been posted anonymously or through an alias, making it difficult to determine its origin. In other cases, the mis-statements are made by companies or financial advisers who do not take the same care in preparing electronic communications as they would in preparing an official filing for regulators.
Through anonymous online touts and misrepresentations, cyber-schemers have used the internet to help them artificially run-up the price of thinly traded securities.
The power of the internet has tempted many new ventures to try to sell securities to the public illegally. The general rule is that securities can be distributed to the public only after the regulators have vetted the company's. Even then, the securities must be distributed through a registered dealer.
New schemes are being uncovered regularly in which companies are advertising and selling securities to the public via the Internet without having filed a prospectus and without fulfilling the legal requirement to provide investors with detailed information about the company and its securities
Some of the abusive investment schemes in cyberspace are indistinguishable from those that have been used elsewhere for decades. The online world, however, represents an enormous advance in the ability of con artists to victimize the unwary.
Some simple precautions can keep you from becoming a victim.
Don't believe everything you read.
Don't assume you know whom you are talking to.
Don't assume that your online service provider polices its investment bulletin boards.
Don't buy thinly traded, little known securities on the basis of online information.
Don't get suckered by claims made about 'inside information.
Be on the lookout for conflicts of interest.
Make sure that the security has been qualified for sale and is being sold by a person properly registered with your securities regulator.
With our busy lives, it's often difficult to keep track of our investments. You may find that you only review them once a year. However, it's important that you keep on top of your finances and review on a regular basis. Here are some tips to help you.
For couples planning their wedding, financial considerations don't end once the caterer's been paid. In fact, deciding on a wedding budget is just the first of many important financial decisions you will make together. To build a strong financial future, you must first understand your own individual approach to money management and then compromise to determine your approach as a couple.
Following are the money styles:
You approach financial issues like a restaurant menu. A little voice tells you that you should have the ‘side salad’ instead of the ‘baked potato with sour cream’. Sometimes you listen, sometimes you don’t. You often know what you should be doing with your finances, and at times you are quite disciplined about budgeting and saving, but you can also let it slide when the call of the mall becomes too enticing. You have some idea of your expenses, and know how much money you should be setting aside for any big, upcoming expenses, such as a wedding or a first house. You should write out a manageable budget and find a way to stick to it. The trick for you will be identifying the things that have knocked you off course in the past and develop a proactive plan, like setting aside a certain amount of fun money each week to save towards the splurge items.
Tax-efficient investing, portfolio diversification, asset allocation - all incredibly boring topics to you; they just get in the way of more important subjects that occupy your day. Your budgeting plan doesn’t go beyond the next one or two paychecks. You’ve felt the pinch of debt, most likely to do with your credit cards. You need to take a careful look at your finances and develop a long-term budget. Reviewing your plan with a financial adviser makes good sense. Having never stuck to a budget in the past, you will need to work hard at developing some discipline. It would be a wise move to set up automatic withdrawals (weekly or monthly) for your savings to make it easier to stick with your plan.
Not surprising, most couples have slightly different takes on life, and money is no different. You don’t have to have the same money style as your spouse. But, it’s important for you to recognize the differences and find ways to compromise.
Seeking the help of a financial adviser can be useful for couples with similar or very different money styles. Money is an emotional issue and an adviser can offer an impartial viewpoint that is based on financial expertise - not family politics. If you’ve already found an adviser and have taken steps to discuss your future finances, good for you! Best wishes for a long and happy future together!
Penny stocks are low-priced stocks that typically start out at less than one dollar per share. They are sold on the premise of significant potential growth.
Very often, companies issuing penny stocks are new to the market. They may not have been in business long enough to establish a proven track record or credible financial history. Another characteristic may be an inexperienced management team. These factors undermine market reception and the ease with which penny stocks can be traded.
Anyone investing in penny stocks should be aware that - when they may want to sell his or her stock - a market may not exist. Penny stocks are ‘priced low’ for a reason.
Despite their bargain basement price, penny stocks are high risk. Unless you have the financial resources to withstand the loss of your initial investment and target returns, penny stocks are not for you.
Why is it so important to get the facts?
Penny stocks are extremely vulnerable to manipulation. Promoters intent on misleading or defrauding investors are counting on you not to do your homework.
A common scam is the “pump and dump”. In this situation, a promoter accumulates an inventory of penny stocks. Using high-pressure sales techniques, the stock is ‘pitched’ to clients. Clients (or investors) are found by any means in the interest of making a market. In the course of events, the price of the penny stock will rise (possibly to several dollars per share). As long as the promoter is able to locate new investors or encourage current clients to increase his or her holdings at a higher price, the scam continues. All the while, the promoter profits. When the scam has run its course, the stock becomes illiquid and the price falls. Hapless investors are left holding the now-worthless stock.
Where to Go for Information?
Unscrupulous promoters are inventive and persistent. Using any means possible, they may spread false information. It pays to double-check their claims through other sources.
Corporate information comes in many forms including:
Stock exchanges have minimum listing requirements that a company must meet before its securities can be traded on that exchange. Among other things, these requirements relate to a company’s finances, management, and share ownership. If a company is not able to meet these minimum requirements, they may trade on the over-the-counter market. The over-the-counter markets consist of a network of dealers who trade among each other either on behalf of individual investors or themselves.
The Changing Markets
Traditionally, penny stocks trade on junior exchanges or over-the-counter markets. Investors benefit from a well regulated, fair and accessible market with enhanced protection through uniform regulatory standards, consistent enforcement, and improved market information.
How Will I Recognize a Penny Stock Scam?
There are a few tell-tale signs: